Crisis Among the Palms

How your retirement account may be fueling rain-forest destruction.

by Jeff Conant

| Spring 2018

Riau, Indonesia - October 13, 2014: Cleared land for palm oil plantation at Tesso Nilo National Park, Sumatera, Indonesia. The land is part of protected forest and threatened by the illegal palm oil expansion.Photo by Clarbondioxide

In May 2015, villagers in Butaw, Liberia, heard a rumor that the CEO of Golden Veroleum, a palm oil company that is one of the few sources of employment in the area, was coming for a visit. It was big news, and the Butaw Youth Association saw an opportunity. They wrote the CEO a letter requesting a meeting: “Please address our plight,” they insisted, by which they meant the theft of their families’ lands, grinding poverty, and wage labor on the plantations that never yielded enough to get beyond mere survival. But the company official declined their invitation, setting off an uprising fueled by years of unrest, and a vicious backlash.

“The Liberian Police arrested peaceful citizens and beat them,” D. Terry Panyonnoh, vice president of the Butaw Youth Association, told reporters. “They were looting our homes, towns, and villages, from May into June. All of us arrested were tortured.”

By the time the dust settled, a half dozen SUVs had been trashed, dozens of people had been brutally beaten and arrested, villagers’ homes were ransacked and looted by police, and the company was forced to shut down operations until human rights agencies could sort out the facts. Though the company – part of a global agribusiness empire run by Malaysian multinational Golden Agri Resources – has undertaken some reforms since, recent reports suggest that the villagers’ plight is largely unchanged.

A month later, in June 2015, across the world in northern Guatemala, effluent from ponds on the property of a local palm oil company called REPSA overflowed into the Pasión River – the lifeblood of a region that was until recently one of the world’s great rainforests but is now largely converted to cattle pasture and plantations. The spill dumped enough malathion, an organophosphate insecticide, to kill hundreds of thousands of fish in what a local court would later rule an “ecocide.” When the verdict came down, the judge ordered REPSA to shut down for six months to allow for an independent investigation. The next day, angry employees of the company blockaded the courthouse and kidnapped three of the plaintiffs. A fourth plaintiff, Indigenous Queq’chi Maya schoolteacher Rigoberto Lima Choc, was shot and killed. The company forced the court to have the judge removed and the verdict was essentially nullified. Two years later, no suspect has been identified for Choc’s murder, and REPSA continues to sell its palm oil to the world market.

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That same summer, El Niño conditions meant a months-long delay in the arrival of the annual monsoon rains, and the forests and peatlands of Indonesia were on fire. The blazes were linked to land clearing for the country’s expanding palm oil and pulpwood plantations. Across the vast archipelago a plume of haze blocked out the sky, leading to international outcry and bumping Indonesia up to the dubious status of the world’s fourth largest emitter of greenhouse gases. Hundreds of thousands of people were forced to evacuate to emergency medical centers in a health crisis that a Harvard University study estimates will contribute to over 100,000 early deaths. Zenzi Suhadi, a forest campaigner with Indonesia’s largest environmental organization Walhi (Friends of the Earth, Indonesia), called the fires a conspiracy. “Peatlands have existed in Indonesia for thousands of years, but [major] forest fires just started in the 1990s,” Suhadi pointed out. “What else is this but a premeditated crime?”

What all these incidents have in common is the red-gold fruit of the oil palm, the source of the most widely traded vegetable oil on the planet.

Having expanded by millions of hectares a year across the tropics in the past several decades, the palm oil industry is a leading cause of rainforest destruction – and a source of both economic dispossession and wage labor for countless people – from the Congo basin to Malaysia to Peru. As a relatively new player on global commodity markets, the industry has quickly grown to rely on global financing to fuel its expansion – meaning that the names of the companies that profit from the fires, the ecocides, the arrests, and the bloodshed, appear to a greater or lesser degree as securities traded on the world’s stock exchanges.

When you investigate the financing of the world’s largest and most notorious palm oil plantation companies, it is surprising how many household names in finance, names like Vanguard, Teachers Insurance and Annuity Associate (TIAA), BlackRock, CitiGroup, and California Public Employees’ Retirement System (CalPERS) come to light. What this means is that IRAs, pension funds, and 401Ks, the financial vehicles that many of us rely on to grow our proverbial nest eggs, are increasingly investing in an industry that is destroying the world’s last rainforests and impoverishing the people who live there.

IF I AM A NURSE, or a public school teacher, or a university professor, and part of my pay is shunted into a pension fund where it’s invested in capital markets, no doubt that’s a good thing for me. Depending on the returns that my fund manager garners for me, I’ll expect to retire in some degree of comfort. Such a promise is the bedrock of the American Dream – work hard, get ahead, and enjoy some relaxation in your old age. But on the rare occasions when I may stop to think about what that money is invested in, an existential question arises – upon what foundation of resources does my comfort depend?

If I’m an ordinary client of one of the large asset management firms, say TIAA or Vanguard or CalPERS, it can be exceedingly difficult and time-consuming to get basic information on what my money is doing. I receive a quarterly report filled with data designed to help me understand the “financial performance” of my investments: Am I earning good money? But it tells me nothing, generally speaking, about the ethical or environmental impacts of my investments.

Now, this could be a small problem, or a big problem, depending on your vantage. If you’re a fund manager, the fact that some industries you put money in may be, in the jargon of finance, exposed to social and environmental risk, is not an existential threat. If, on the other hand, you are a peasant farmer in a rainforest village that is being razed and replaced by worker housing for a palm oil company, then every penny that props up the company is a strike against your livelihood, your dignity, and your culture. And if you’re a pension-holding U.S. citizen concerned about ethics and the future of the planet and its species, you may want assurance that your money is not driving climate change and human rights abuses.

The global palm oil sector – an industry almost unknown in the West a decade ago – is projected to be worth $88 billion by the year 2022. The fat, a staple traditional to West Africa that’s been hybridized and globalized to meet the demands of industrial production, is prized for its efficiency (it produces three times more oil than any other crop, by unit of volume), its versatility (it’s easily rendered colorless and flavorless and stays solid to a high melting point), and its lack of unhealthy trans fats (a 2015 U.S. FDA ban on trans fats has boosted sales in the U.S.). These qualities make it the go-to fat for use in thousands of consumer products from baked goods and ice cream to cleaning products and cosmetics. Palm oil exported from Indonesia, West Africa, and Central America winds up everywhere. According to USDA figures, about 16 percent of global production goes to biofuels, 12 percent to the chemical industry, and the vast bulk – 71 percent – to the food industry. It’s in Nestle’s chocolates, in PepsiCo’s Frito-Lay snacks, in Campbell’s cookies and crackers; it’s the fat that makes your Krispy Kreme doughnuts so … fatty.Add to this the fact that you can burn it as a biodiesel and you’ve got a miracle crop, and a boon for investors.

The problem is, if production of this miracle crop is not put in check, it could lead to the extinction of Bornean orangutans, Sumatran elephants, and African greats apes, not to mention the cultures and livelihoods of forest-dwelling people across the tropics.

Thanks to a recent wave of campaigning by environmental and human rights groups, most of the big food companies and the large agribusiness firms that supply them now have policy commitments to rid their operations of deforestation and other abuses. But turning words on paper into reality on the ground is slow and fraught with challenges. In part, that’s because palm oil supply chains are something of a Gordian knot: The nature of the commodity demands that shipping routes and purchasing contracts fluctuate with supply and demand. So huge effort is required to trace the labyrinthine route from plantation to product. (Full disclosure here – I campaign on this issue for the environmental advocacy group Friends of the Earth.)

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WITH THE EXCEPTION OF Cargill, Archer Daniels Midland, and Unilever – the European company that inaugurated the global palm oil trade when it took over King Leopold’s plantations in the Belgian Congo in the early 20th century – the large palm oil juggernauts are mostly all southeast Asian, and therefore wholly unfamiliar to U.S. consumers and investors. So how did they end up in our stock portfolios?

As it happens, the growth of the palm oil industry has coincided with two global trends in finance. The first is a massive increase in investments going to emerging markets (i.e., developing countries). When MCSI, a leading financial service provider, introduced its first fund made entirely of emerging markets companies in 1987, it contained 290 companies from eight countries. Today, the same fund has 820 companies in 22 countries. According to research by the Ethical Investment Research Services, investments in emerging markets grew by 30 percent just between 2011 and 2015.

These same years saw the massive growth of “index funds,” and what’s known as passive index investing. That is, packaging together a bundle of companies into an “index” whose fluctuations follow the market as a whole, and selling the indexed fund as a low-risk investment product. Between 2000 and 2014, the amount of money invested in index mutual funds more than quintupled. By some accounts, up to 20 percent of stocks are now traded in indexed funds.

As the Asian agribusiness giants grew through the ’80s and ’90s and into the ’00s, largely by taking over vast swaths of land and converting rainforests to plantations, many of these companies “went public” – that is, began selling shares on the stock market. The companies’ sheer size ensures that their shares appear in any portfolio of Asian securities, making them a common stock for large funds that invest “across the market.” This, plus the fact that growing demand for palm oil makes it a good medium-term investment, has ensured that these companies’ stock, just like the oil itself, has become ubiquitous.

AS WITH OTHER industries, the palm oil industry has no dearth of boosters who hail its economic promise, not only for corporate shareholders, but for the world’s bottom billion. Dr. Bungaran Saragih, Indonesia’s Minister of Agriculture in 2004, heralded the industry at the time as a means to “protect, facilitate, and promote Indonesia’s small family farmers’ better livelihood along with their fellow landless laborers” and “uplift the well-being of the poorest segment of Indonesia’s countrymen.” Since then the area under oil palm cultivation in Indonesia has quadrupled, to cover some 40,000 square miles.

Palm oil does build rural economies, to an extent. In remote Central Kalimantan, on the Indonesian side of the island of Borneo, young men with long-handled sickles cut down the immensely heavy bunches of fruit for a couple of dollars a day. Transporters pick up the piles of palm fruit and deliver them to middlemen who weigh them and send them for processing at oil mills, earning their few dollars. And the local mill, which fills the sky with black smoke while pressing 60 to 80 tons of palm fruits every hour, provides wages to anywhere from dozens to hundreds of people.

Wages vary widely from company to company, job to job, and even month to month, as fluctuations in the global price of the oil are passed on to workers. Uncontracted day-laborers may earn barely enough to survive, while a farmer who leases his land to the plantation, as well as his labor, can earn up to $265 a month – enough to be able to indulge in luxuries like a television and motorbikes for the family.

In a survey of 12 villages in Central Sumatra conducted by social scientists in 2007, a majority of villagers hoped oil palm would take over as the predominant perennial cash crop in the next 20 years, taking the place of a mixed agroforestry system they’d historically relied on. The principal reasons cited were greater access to education and healthcare, clearly demonstrating that oil palm was viewed by these communities as their best option for securing a steady source of income.

But income is hardly the sole measure of well-being – and wages for labor are not the sole economic issue in the palm oil sector. The same study that showed rural smallholder farmers welcoming the benefits of oil palm development showed that landowners who sold or otherwise gave up their land to agribusiness companies could be driven deeply into poverty. In this sense, the palm oil boom has come to replace less environmentally damaging, subsistence livelihoods. It has brought debt, wealth inequality, and, of course, ecological destruction on a vast scale.

In Indonesia, villagers frequently concede to relinquishing land to corporations because the plantation companies promise them roads, schools, and clinics. But companies have by and large failed to fulfill the terms of community agreements, leaving villagers still wanting for the healthcare and educational opportunities they expected. “Plantation companies promise to build everything, but too often they build nothing,” says Arie Rompas, a campaigner with Walhi’s Central Kalimantan branch. Farmers often don’t know what they are getting into. Lack of information and transparency are big problems. “A company often collects the farmers’ land certificates, after which they become laborers on their own land,” Rompas says.

OVER THE PAST DECADE, the fossil fuel divestment movement has shone a crucial light on the ways in which financial markets underlie the industries that are driving planetary destruction. As Bill McKibben, climate activist and founder of 350.org, is fond of saying, “If it’s wrong to wreck the planet, it’s wrong to profit from the wreckage.” Thanks to dramatic organizing on college campuses and in cities, billions of dollars have been moved out of fossil fuels and into more sustainable alternatives.

According to Christopher Breckon, a researcher with MCSI, the world’s leading provider of sustainability data to investors, “By 2014 the [divestment] movement had reached a tipping point as university endowments, foundations, and even cities sought alternatives to fossil fuel exposure in their portfolios – and found little available. It was this need that led to the development of the first low carbon indexes – portfolios of companies that largely or entirely excluded those involved in fossil fuel extraction or combustion.”

Most investment firms prefer to avoid divestment when trying to bring about changes in company behavior. By and large, when pressed to address the environmental, social, and governance challenges – ESG, in investor lingo – of their investees, fund managers prefer to “engage,” that is, to talk to the companies and persuade them to do better. But according to Kate Kroll, a shareholder advocate at the activist investment firm Green Century Asset Management, “Asking ExxonMobil to stop causing climate change is like asking Starbucks to stop producing coffee – it’s their whole business model. So the only option is divestment.”

The same is not true for palm oil, Kroll argues – and many advocates agree – because palm oil can arguably be grown without razing tropical forests. Pressure from investors can be crucial in catalyzing change to that end.

Consequently, rather than divest, Green Century and several other socially responsible investors are buying shares in the consumer brands that use palm oil, and pressuring them to clean up their supply chains by passing shareholder resolutions at these companies’ annual meetings. Because deforestation causes up to 18 percent of global greenhouse gas emissions, and industrial agriculture drives an additional 13 percent, such efforts are a clear continuation of the climate divestment movement. The key difference is that it’s not necessarily about divestment per se, but about urging financiers to use their leverage to drive sustainability.

But, so far, the really big investment firms have been unwilling to jump into the fray.

CalPERS – the largest public pension fund in the U.S., which manages pensions and health benefits for more than 1.6 million California public employees – has about $500 million invested in palm oil companies, mostly through index funds, and billions more in the consumer brands that drive demand. TIAA, which manages pensions for teachers, nurses, unions, and a number of nonprofits, has roughly $170 million in palm oil companies, and, again, billions more in the consumer brands. Vanguard and BlackRock, the twin Goliaths in the world of fund managers, each have billions directly in the plantation companies and agribusiness traders that dominate the palm oil sector.

For years, CalPERS veered back and forth regarding investments in developing countries. In 2002, the firm announced that it was pulling funds out of several Southeast Asian economies due to “concerns over basic democratic principles,” and for some years the firm maintained a policy of excluding investments in a subset of less-developed countries due to political and economic risks. But in 2006 CalPERS began investing in Indonesia again, and shortly thereafter expanded its investments in emerging markets across the world. While there continued to be concerns about financial risk from exposure to corruption, the prevailing logic at the time was that CalPERS’ philosophy of positive engagement – the idea that it could use its financial leverage to bring about positive reforms in the companies it invested in – would offset the risk, and further the firm’s mission of transforming markets. But if the palm oil sector is any indication, the promise of market transformation doesn’t seem to be bearing out.

Today, CalPERS’ shares in palm oil companies include the companies directly involved in the Liberia beatings and the Indonesian fires and companies that source their oil from REPSA, the Guatemalan company that caused the massive river spill and associated human rights violations in 2015. It’s been exceedingly difficult to get CalPERS to investigate its investments in palm oil. Earlier this year, after receiving tens of thousands of petitions and a letter from former California Congressman Henry Waxman, CalPERS’ head of corporate governance Anne Simpson suggested that the firm would be open to “a reasonable action plan on land and palm oil.”

Meanwhile, TIAA, too, has also been hard to budge. With $834 billion in assets under management, TIAA is among the 100 largest corporations in the U.S., serving over 5 million people from more than 16,000 institutions.

In recent years, TIAA has taken a leading role in promoting social responsibility in investment through its responsible investment portfolios and practices, its commitment to responsible farmland investment, and its membership in the UN Principles for Responsible Investment. Yet, the fund is under fire from family farmer organizations for buying some 700,000 acres of farmland in Brazil, most of it in the country’s fragile cerrado ecosystem, where industrial soy plantations are wiping out the native savannah, and foreign investment – led by TIAA itself – is pricing out smallholder farmers and local communities.

As of March 2017, TIAA’s shares in palm oil were relatively small compared to its overall holdings, but still significant given the companies involved. The holdings include shares in several Malaysian companies implicated in the 2015 fires in Kalimantan; Felda Global Ventures, a company exposed by the Wall Street Journal in 2015 for its involvement in human trafficking, forced labor, exploitation, and lack of payments to workers on Malaysian palm oil plantations; and IOI, a company that purchases REPSA’s ecocide-tinged Guatemalan palm oil and sells it to the European market.

In response to pressure from advocates at the Union of Concerned Scientists – a TIAA client – Jose Minaya, President of Nuveen Investments which oversees TIAA’s land purchases, said: “TIAA has no direct investments in palm oil. Because we are dedicated to offering our customers choices, however, we do hold a variety of public company index funds … some of which may hold palm oil producers. As you may know, the mix of investments in an index fund is set by an index calculator, not individual institutional investors.” In other words, TIAA washes its hands of any responsibility for its exposure to tropical forest destruction, because, that’s just how the market works.

ACTUALLY, THERE ARE a number of things TIAA, CalPERS, and other investors could do. For one they could drop the index funds that contain these problem companies, or even better, could pioneer the development of “deforestation-free, land grab-free” index funds. They could also adopt a policy across all of their portfolios that requires them to screen for risks of deforestation and land grabbing. Such an approach would tell companies, if you want investment from leading U.S asset managers, you need to show that you are not destroying rainforests, grabbing land, or violating human rights – essentially creating a market incentive for companies to end these practices.

But as I write this, the Trump administration is proposing to gut the Dodd-Frank rules that reformed Wall Street after the 2008 global financial meltdown and add on a new rule that would limit shareholder activism to billionaire investors, which would have disastrous effects for the power of ordinary investors and shareholder advocates to use their financial stakes to leverage change.

Meanwhile, another in a series of toxic spills by REPSA or one of its sister companies is poisoning fish in Guatemala’s Pasión River. And as another likely record-setting summer approaches, it promises to foster more hard-to-extinguish blazes in Indonesia’s forests.

For at least 500 years, the wealth of northern nations has been built on resources extracted from the land and peoples of the tropical latitudes – what economist David Harvey, has dubbed “accumulation by dispossession.” Arguably, making the connection between the accumulation side and the dispossession side – in this case, between our retirement funds and land grabbing – could be one step in fighting this centuries-long trend.

Jeff Conant is an author and Senior International Forests Campaign Director with Friends of the Earth-U.S. Reprinted from Earth Island Journal (Summer 2017), a quarterly magazine that combines investigative journalism and thought-provoking essays to make the subtle but profound connections between the environment and other contemporary issues.